There are a few questions that chartered accountants get asked all the time. They include (but are in no way limited to): What’s the key to growing a successful business? What’s the most tax-efficient way to draw profits from a corporation? Should I lease or buy my company car? What’s the minimum amount of time that I should retain old tax records?
The answer to the latter query is becoming more complex as the Canada Revenue Agency continues to take a hardline approach to tax compliance and enforcement. As we always advise clients weighing important financial or accounting decisions—particularly when it comes to record-keeping—it’s always better to be safe than sorry. But now the taxman’s own directives demand more than basic due diligence and common sense when it comes to saving receipts and other documentation.
According to recent CRA guidance, you may need to save more than half a decade’s worth of tax records to avoid a nightmare scenario in the event that your business or personal tax returns are audited. If you’ve already gone digital (a move we highly recommend), then it may be time to upgrade your hard drive. And remember: when maintaining any digital record, it’s extremely important that you also maintain complete and reliable backup copies.
Generally speaking, CRA requires business owners to maintain books and records, although the agency doesn’t specify how those records must be kept. The only direction is that a business owner’s records must allow for the determination of taxes owing (including HST), as well as for verification of political or charitable donations. The records must be supported by source documents such as invoices, cash register receipts, contracts, credit card slips, bank statements and tax returns. In addition to confirming taxes owing, records allow CRA to cross-check any tax deductions that your company may have claimed in the event of an audit or reassessment.
For most individuals, corporations, partnerships and trusts, CRA requires that records be kept for six years from the end of the last tax year in which a transaction could be used to calculate income taxes—and two years from the date of the dissolution of a corporation, in situations where a business is being wound down. That’s a lengthy timeline, by any reasonable standard.
In some cases, retaining documentation for even longer periods is required. If a capital gain is reported in 2017 for a property purchased in 2001, for example, the relevant documentation determining the cost would have to be kept until 2023—a whopping 22 years!
Now, you may ask: What’s the real chance of being caught should I decide to trash my records and not comply with the six-year rule? It turns out the odds are fairly high, particularly as the federal government continues to deploy increasingly sophisticated digital tools to verify and cross-check tax documentation.
Case in point: the 2017 federal budget allotted $523.9 million over five years to tackle tax evasion and avoidance—that’s on top of enforcement efforts that have already been enhanced in recent budgets. As such, entrepreneurs can expect greater scrutiny of lawfully prepared tax returns. And those attempting to cheat the system should think twice. CRA’s added funding has also increased the number of auditors, led to enhancements in intelligence infrastructure and has seen greater targeting of non-compliant domestic and international businesses operating within Canada’s tax jurisdiction. We’re already seeing this play out, with a greater number of business owners being asked to verify expenses, or being challenged on the validity of certain claims. High-profile incidents of alleged off-shore tax evasion—as discovered in the Panama Papers documentation and other recent examples of aggressive tax minimization tactics leveraged by some high net-worth Canadians—has only bolstered CRA’s determination to crack down on perceived fraud or malfeasance.
In other words, if you were ever going to get caught fudging receipts or deductions—and for the record, cheating on tax returns is simply never worth the risk—or wind up in an audit situation, then now is the time when it’s most likely to occur. Failing to maintain proper records such as receipts and invoices is a guaranteed way to face a costly tax reassessment or fines (or both) in the event of an audit.
It’s also important to be aware that the destruction of records with the intent (real or perceived) to evade tax payment, is also an offence under section 239 of the Income Tax Act. If CRA takes you to court and the case results in prosecution, you could face jail time and a fine of at least $1,000. That worst-case scenario is very rare, but prosecutions do happen from time to time. Again, it’s simply not worth the risk. It’s important to note that we’re also seeing the CRA become more aggressive in litigating tax matters, sometimes choosing to go to court rather than arriving at a settlement with the taxpayer under investigation, as would have been a common approach in the past.
The best practice is to save your tax records (including receipts and invoices), and if you’re not sure, ask your professional tax advisor so you can be prepared should the CRA come knocking. It’s a simple step that can save you major headaches down the road.
George Grignano, Partner